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What is a REIT?

What are REITs?

REITs or Real estate investment trusts are popular investments for real estate investors. They are a type of Mutual Fund.

For most people, investing in real estate is limited to residential ownership with little thought of owning shopping complexes, industrial warehouses or office buildings, etc. 

Now, real estate investors can literally stretch their investment horizon with REITs.

They give an investor a practical and effective means to include professionally-managed real estate in their own investment portfolio. 

It also allows small investors a means to invest in real estate assets through a vehicle that is highly liquid compared to buying real estate itself and with smaller investment capital.

What is a Real Estate Investment Trust? 

A real estate investment trust is a collective investment vehicle, in the form of a trust fund.  

It pools money from investors and uses the pooled capital to buy, manage and sell real estate assets, such as residential or commercial buildings, retail or industrial lots, or other real estate-related assets like shares in public-listed property companies, listed or unlisted debt securities of property companies, etc.

It is a passive investment vehicle that acquires and holds income-generating real estate.

REITs are driven primarily by recurrent rental income from real estate and will distribute their income based on the prevalent tax structure governing REITs, thus providing stable and consistent income to unit holders.

What is an RMC?

A REIT Management Company or RMC is a company that owns, operates, or finances income-producing real estate. 

REITs provide an investment opportunity, like a mutual fund.

It makes it possible for small investors to benefit from valuable real estate. 

It’s not just for Institutional investors, banks, and hedge funds.

It presents the opportunity to access dividend-based income and total returns, and help communities grow, thrive, and revitalize.

The prospects of real estate investment trusts are often measured in terms of capital growth. 

The more a REIT is growing, the more likely it is that dividends are going to flow steadily and even increase. 

A REIT’s main property type and its growth are often linked.

For example, data center REITs are increasing in popularity, but office REITs might suffer as more employees start working from home.

Advantages of investing in a Real Estate Investment Trust 

Real Estate Investment Trusts are extremely beneficial for the development of an economy.

They allow dormant investable funds to be channeled into infrastructure projects such as apartment complexes, hospitals, schools, and many more.

Diversification

REITs allow you to diversify your investment portfolio through exposure to Real Estate without the hassles related to owning and managing commercial property. 

This diversification allows you to go beyond the usual asset classes of Equity, Debt, and Gold as part of your overall Asset Allocation Strategy.

Higher Returns

REITs give investors access to the benefits of real estate even with small amounts of capital.

They often produce high-yield dividends that can translate into a steady income. 

To get the most out of your investment and minimize the risks, choose carefully according to their outlook, past performance, dividend history, and growth potential. 

Risks involved in investing in a Real Estate Investment Trust 

REITs are a very good investment opportunity for people who want to diversify their portfolios in the real estate sector.

Real Estate Investment Trusts are not risk-free. There is nothing in the world as risk-free. Risk is an important factor in all investment instruments.

To understand what type of risks are involved let’s break down it into 2 types.

Risks of Non-Traded REITs

Non-Traded REITs are types of Real Estate Investment Trusts that are not listed on the stock exchange. 

  • Illiquidity

Lack of liquidity makes Non-Traded REITs very risky investments due to their minimum investment time duration requirement of 5 to 7 years. 

One reason for such a long-time investment is because there won’t be any buyers when you will go to sell them.

  • Upfront Fees

Non-Traded REITs often have high upfront fees.

They normally have a 10% upfront fee but they can also go higher as much as 15%.

Publicly Traded REITs

Publicly traded funds are less risky than no traded REITs. They are listed on stock exchanges and investors have full data on their performance which enables them to research them properly.

  • Interest Rates

Interest rates are the biggest threat to real estate investment trusts. 

In a country where inflation is higher than normal then the central banks and governments increase the interest rates to control the flow of cash. 

This moves the investors to safer investments like banks, bonds, and treasuries.

  • Taxes

Taxes are not a risk but it is an important factor for an investor. Dividends that you get from REITs are income based. 

In this case, you will be paying income tax which is higher than capital and dividend tax rates.

Conclusion

Real Estate Investment Trusts are very specific and niche. They are designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks. 

If you are looking to diversify your portfolio or don’t have enough cash to buy real estate then REITs are the best option for you.

Note: This is not financial advice this article is only for information purposes.

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